In its first full review since agreeing a $16.7bn standby facility earlier this year, the IMF warned that the two main risks it had foreseen – intensification of the conflict in the east and a natural gas shut-off by Russia – had materialised.

If fighting continued in eastern Ukraine at the same level throughout 2015, it added, Ukraine would need additional financing of $19bn to shore up its central bank reserves.

“I am afraid that this should be the IMF’s base case. The original IMF programme was built on totally unrealistic assumptions,” said Tim Ash, economist at Standard Bank, in a note to clients. “The main question being asked by investors is when, not if, Ukraine will be forced to restructure/reprofile its debt ratios.”

Under its base case, it forecast Ukraine’s economy would contract 6.5 per cent this year – making it one of the worst performers in the world – rather than the 5 per cent previously assumed. Growth next year would be only 1 per cent, down from 2 per cent previously forecast, even if the fighting stopped soon.

If fighting continued through the rest of this year and 2015, however, the economy would contract by 7.3 per cent this year and another 4.2 per cent next year.

Many experts had warned when the IMF-led bailout was agreed that it was based on the most optimistic assumptions, with western political leaders anxious to support the new government in Kiev. But the fund conceded that Ukraine now faced “heightened geopolitical tensions and deepening economic crisis”.

“Intensification of the conflict in the east and escalation of the gas dispute with Gazprom, two of the key risks identified at the time of the programme request, have materialised,” it added. These had affected “confidence, balance of payment flows, economic activity and budget execution” and had led to larger-than-anticipated deposit outflows and bigger depreciation of the national currency, the hryvnia.

Inquiring minds may be wondering how Ukraine can possibly pay this back. The answer is they can't and won't. Alternatively Ukraine will be in an economic depression for decades if they try.

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